Carriers love to throw variants of this term around. Cogent contends that its acquired networks cost some $11B to build. Broadwing used to boast how it took $12B to build their network. Level 3 says its networks represent some $25B in invested capital, and that it would take even more than that to replace their network today. Others do the same, taking pride in what they picked up at garage sales. But it is all smoke.
Why? Because using the cost of replacement to value an asset makes an assumption that is blatantly false much of the time in the telecom space: that anyone actually might consider replacing the asset. Cogent is valued far beneath the cost of its acquired networks because when they were built those networks were expensive boondoggles that never justified their cost. The same goes for the assets Level 3 acquired, and to an extent the one that they built themselves, at least so far. Carriers point to replacement value because they cannot point to their actual valuation and be proud, at least not yet.
Some go further with this contention, that the high replacement value is an *advantage*, a moat for the competition to cross. Well, there is a silver lining for everything I suppose, but what needs to be acknowledged is that this moat exists solely because of the failure of the assets to justify the investment. OF COURSE nobody will enter a market that isn’t strong enough to generate financial returns on an investment. If it were a good market, then these companies would have valuations above replacement cost, and suddenly people might think about entering alongside them. Having a moat because your sector is unattractive isn’t really where one wants to be.
I suppose we just need to think of this as a target: when Level 3 or Cogent reaches a valuation similar to that of its replacement cost, then perhaps at long last they really have made it to the other side. But for me, when a carrier quotes me such a number to say how much they ought to be worth or how much potential they have, it just tells me how bad things still are. If I buy a house that was once valued at $1M and is now valued at $100K, the only thing the $1M shows is the folly of the guy who bought it for $1M. For me it is still worth what I can sell it for and nothing more, except perhaps that someday the housing market will be insane again!
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